Monthly Archives: April 2014

No End to the Consenses in Macroeconomic Theory

If you have ever taken any international relations classes you may have come across the Popparian vs Kuhnian debate. On the Social Sciences EBSCO Host database I found a great article from the American Journal of Economics and Sociology April 2013 issue titled “No End to the Consensus in Macroeconomic Theory? A Methodological Inquiry.” This article by John McCombie and Maureen Pike is one that I recommend everyone in class read. At least the first 8 or so pages. The authors’ explanation of microfoundations and DSGE models is on point. What I loved about this article are the inferences about economic paradigms. I was able to combine my PSCI 321 knowledge with ECON 488 to more clearly see the value of macroeconomics.

The question is do economic theories follow a linear path or a paradigmatic one? Karl Popper made the claim that theories build upon each other as hypotheses are falsified. In opposition, Thomas Kuhn believes that with the addition of new information, a revolution occurs in theory and a new paradigm is formed. What makes paradigms distinct is their incommensurability. Terms and facts from the old paradigm have no relation to the new paradigm. An often cited example of the is the shift from the Ptolemaic system where the sun revolves around the Earth to the Copernican system where the Earth revolves around the Sun. All belief in the Ptolemaic system has clearly been left in the past. So in relation to economics, the authors describe the Neoclassical Synthesis and the New Neoclassical Synthesis as consecutive paradigms. But economics does not have complete incommensurability. Rather, there is weak incommensurability since the separate schools of thought often build upon the same models, but disagree when it comes to the results.

Are these even paradigms at all since no big revolution of knowledge has occurred in macroeconomics? Is it coming? Maybe economics is not meant to be seen in a Kuhnian view but rather with a Popparian view. Popper emphasized falsifiability: when a hypothesis is falsified or disproved, it is changed until the next hypothesis is tested and falsified. Hypotheses build upon each other as they are falsified. But in economics, models are not thrown away when theories are falsified. Nothing is changed in fact when theories are falsified. Economists just hold onto their schools with all the strength they have no matter how crazy they seem. This would not be seen as Popparian at all. Its not even scientific. New Keynesian DSGE models failed. They were not able to be applied to the real economy in a helpful way. I see this as being falsified. But DSGE models have not been changed to allow for new models to build upon them. There is no linear path. Instead we are suggesting that DSGE models are either “good enough” or they should be thrown away completely and replaced with models which do not exist yet.

There is a disconnect between economics and the scientific method whether it involves a linear building of hypotheses and theories or a revolution of knowledge followed by a paradigm shift. What we do have is chaos. No single school has been named THE school and no school is willing to give up even if it is clear it is wrong. So is economics really science? Is it even worth paying attention to at this point? When macroeconomic theories are being falsified and spiraling into chaos, where is the revolution?

The Psychoanalytical Take on the Great Recession

After reading Aditya Chakraborttya’s article “Economics has failed us: but where are the fresh voices?” I was looking for an opinion on the Great Recession from someone other than an economist. I came across an article from the International Journal of Critical Psychology titled, “Irrational exuberance: Neoliberal subjectivity and the perversion of truth (2010).” I immediately noticed that Irrational Exuberance is also the title of Robert Shiller’s book. The article’s author is Lynne Layton, Assistant Clinical Professor of Psychology at Harvard Medical School.

This article was not at all what I expected but  found it interesting nonetheless. Layton draws on Freud’s work regarding the perversion of truth (substitution a less painful lie for the truth) and shockingly goes into details on sexuality which you may not have thought has anything to do with economics. Her vignettes provide realistic scenarios of ordinary people’s lives pertaining to housing prices and endless wants and needs. After the replacement of defunct Keynesian principles with Neoliberalism in the 1970s, many people started to feel that the government was no longer able to take care of them. They felt vulnerable. By the Bush years, the government fostered the idea that vulnerability and scarcity could be addressed only with economic growth. The takeover of free market fundamentalism led to people becoming more susceptible to the feedback which leads to economic bubbles. The 1980s and 1990s led to great materialism but before that people expected the government to prevent housing prices from getting out of control. Shiller writes, “Our increasing public commitment to market solutions to economic problems is the ultimate cause of the public’s worry about instabilities in home prices.”

Some sources of feedback which makes us more vulnerable to economic bubbles are: internet culture which promotes a false sense of omnipotent control, the ubiquitous statement in books that “any stock market decline must quickly be reversed,” and the unwarranted optimism of the business media. (Shiller)

Layton makes the claim that based in psychoanalytic theory, people who do not feel cared for by the government (since housing prices skyrocketed) will not be able to  face limits and thus be even more vulnerable to bubbles. At the same time, people are oddly calmed by the recession since there is now a sense that everyone is in the same boat.

This article came out two years before Chakraborttya made the claim that no social scientists have given their input on the social consequences of the Great Recession. Although Chakraborttya was also mainly focused on the U.K. so it is possible that social scientists in the United States have been more attentive to the economic crisis and its effects. I am glad that there is a presence of psychologists and sociologists in economics. I really think that in order to get to the bottom of the Macro problem, we need to look deeper into the thoughts and behaviors of the individual.

Some more Shiller

Yes I went out searching specifically for more Robert Shiller. I find it really easy to get into what he has to say. I came across an opinion piece titled “The Financial Fire Next Time” in which he discusses ideas for preventing another major financial crisis. The key theme in this article is “overhaul/reform.” Since people are accustomed to hearing the simplified version of he economy through the media, they are less likely to push for change. Change can be confusing, especially when it comes to economics. Therefore, Shiller feels that currently we are stuck with existing practices (mainstream economics) and cannot do much more than minor tweaking.

Coming out of the recession, the focus is now on preventing future crashes, but there is little chance of doing that when only minor tweaking to the current models is possible. Otherwise, a major reform will have to be put in place. Not only in the United States but in all major countries (doesn’t seem too likely though). Shiller also notes a lack of creativity and enthusiasm to develop a truly protected economic system.

Shiller ended this article with the following quote which I think sums up his idea perfectly: “Firefighting is more glamorous than fire prevention.” Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. That is not a recipe for a happy ending.” -Joseph Tracy, Federal Reserve Bank of New York

Will we ever achieve the economic overhaul needed to keep ahead of the crashes or will we always be one step behind?

Will the economy be in the hands of sociologists now?

Aditya Chakraborttya, author of “Economics has failed us: but where are the fresh voices?” has posed a very interesting question: If economists failed to predict the great recession, why have social scientists kept quiet about the fallout? It does in fact seem logical that sociologists, anthropologists, and political scientists would be having a field day studying the consequences of an “unexpected” economic disaster. However, the author has done his research and found that out of over 2,500 members of Britain’s leading sociological journals, only 13 articles have any relation to the economy or finance. Do social scientists just not care about the economy? That seems unlikely. But why have they not spoken up about the aftermath of the recession?

This may once again get into our discussion about the status of economics as a science. Maybe economics is not considered a science even by social scientists. Is economics so low on the science totem pole that no scientific field is willing to consider it?

The author ends the article with this thought: “When an entire discipline does what the sociologists did at their conference last week and devotes as much time to discussing the holistic massage industry (“using a Foucauldian lens”) as to analysing financiers, they’re never going to challenge the dominance of mainstream economics. And it’s hard to believe they really want to.”

Since I have been thinking about the necessity of “mainstream” economics, this article made me think that maybe it is not up to economists to decide whether or not mainstream macro has failed. It might be that social scientists are the best ones to decide what policy is good for the people. If only they cared…


The Great Recession hit when I was in middle school. That was a long time ago. In middle school I clearly didn’t care what was going on in the economy. Except for what we discussed in class this semester I never really bothered to understand what caused the recession. All I knew was that it was hard for people who wanted a job to get a job. I didn’t have a job until senior year of high school so none of that mattered to me. Now as a sophomore I have not taken nearly enough economics courses to understand the details. The past week or so that we have been talking about the housing bubble and indicators of the recession, all I have been able to think in class is: What is a mortgage backed security? What are assets exactly? Why do they matter in this class? What is a housing bubble? (commence mental images of a suburban house blowing up like a balloon) How am I going to write a ten page paper if I do not know anything about this stuff? Knowing that there are a few more sophomores in class, I am wondering if I am the only one who has been struggling to connect the dots. As for the essay, I do have my opinions on the future of macroeconomics. These opinions may not be backed by equations and financial terms, but hopefully simple logic will get me through this.

The New Neoclassical Synthesis

Simon Wren-Lewis, an economics professor at Oxford University put up an interesting blog post a couple years ago called The Return of Schools of Thought Macro. He recalled when he was studying macroeconomics and it was almost necessary for people to take sides, picking a school of thought to adhere to. Wren-Lewis called this more of a belief system than a science.

Then suddenly macroeconomics become unified in what was called The New Neoclassical Synthesis. The Development of New Keynesian theory and microfoundations created what is today mainstream macroeconomics. Wren-Lewis claimed that during this time he had all his masters students forget about schools of thought and focus on what was mainstream:

“…start with Solow, but quickly replace a fixed savings propensity by an optimising intertemporal consumer to get the basic Ramsey model. Add endogenous labour supply to get RBC. Probably talk a bit about overlapping generations. Hopefully add to what was in Romer by doing some open economy stuff. Then add New Keynesian theory built around sticky prices. If the student went on to work in a central bank, they would probably encounter this framework as a central part of that institution’s forecasting and policy analysis.”

Although the idea of having a unified field in macroeconomics sounds pretty nice, it is easy to see that today the synthesis is gone. Growing suspicion of New Keynesian models after the recession caused students to think that the field of macro is once again a battle of the schools. Wren-Lewis complains that having competing schools of thought is confusing and things would be much better with everyone buying into New Keynesianism. Clearly he thinks macro is broken for reasons different than what we are looking at. His definition of broken is having macroeconomics believe in theory other than what is mainstream.

Of course I do not agree with him. I understand how life would be easier if macro was a unified field like micro but I do not think that the New Keynesian school is the one to stick with. Especially since we know that the economists who did predict the recession were not the mainstream economists. For now I think it is dangerous to play along with what is “mainstream.” We would just end up missing out on more of the big stuff.

Robert Shiller and Miley Cyrus

After reading Robert Shiller’s article “Is Economics a Science?” I really wish I had chosen the behavioral economics group to study. It just makes a lot of sense to me. This article was a pretty easy read but Shiller makes some great points about the scientific status of economics.

First of all I find it ridiculous that the very first thing Shiller says in this article is “I am one of the winners of this year’s Nobel Memorial Prize in Economic Sciences…” Now I have never met Robert Shiller so I do not want to judge him but normally when someone starts any conversation with “I won the Nobel Prize” you can’t help but think that they are a little full of themselves. But I am not going to take too many points off for that because I like everything else he says.

Economics is commonly criticized by the scientific community as a pseudoscience. Economics is heavily focused on policy rather than the discovery of fundamentals. Policy is affected by politics and politics are affected by public attention and public attention is affected by human behavior. It is a challenge to make economic models for the human element of the economy since people change their minds often and for various reasons. Hence, a lot of approximation is needed in economic models. Critics claim that economists use math as to make economics look scientific but it is really all for show.

Shiller points out that the hard sciences and other research fields are subject to the same challenges and criticisms as economics. Lee Smolin wrote an entire book criticizing the development of string theory in Physics for not being based on anything testable. Shiller asks why is the Nobel Prize in Economics Sciences instead of just plain Economics? Apparently the word “science” is added to any field that is trying to distinguish itself as a truly scientific field as opposed to a bogus counterpart. Think the difference between Astronomical Science (Astronomy) and Astrology. One is considered true science while the other is not. So are there two different types of economics? One field of economics wins Nobel Prizes while the other doesn’t? What is the deciding factor?

Shiller only poses this question providing the arguments for or against economics as a science. I like that he leaves off saying that economics still has to develop and become stronger. Its refreshing to hear that after 200 or so years of economic thinking, we really have no idea what were doing.

I feel like Behavioral Economics is the Miley Cyrus of the economics world. Its young and new and fresh but doesn’t yet know its place in the world so it does a lot of crazy things that make the older folks freak out. Yet, even with all the criticism it still manages to make a statement. After all, there is no such thing as bad publicity.

Anyway I am finding that I really like Behavioral Economics and I will definitely be reading more by Robert Shiller.